Defined contribution pensions – what does value mean?

Reading through the Office of Fair Trading’s defined contribution workplace pension market study, published today, it struck me that a problem with this issue is that no-one has ever actually defined what ‘good value’ or ‘good member outcomes’ actually are. As such, it seems premature to conclude that all older style contracts appear to be poor value without first defining, what ‘good’ or ‘good value’ actually is.

Similarly, I think it is important to prioritise the factors determining member outcomes. Contribution adequacy and investment performance are far more important than member charges, albeit we wholeheartedly agree that excessive pensions charges cannot be justified.

But on the issue of charges in isolation, whilst they are still a factor in determining member outcomes, it is dangerous to assume that all higher charging contracts represent poor value for money. Many older contracts will have guaranteed returns relating to with-profits bonuses, or possibly guaranteed annuity rates meaning that to provide such benefits in the first place, the charges are correspondingly more expensive for the consumer. Whilst these contracts are now the exception rather than the rule, it is important we don’t unravel important benefits to those who have paid for them.

As a pre-cursor to automatic enrolment, let us not forget that, whilst stakeholder pensions legislation was a total failure in respect of getting employees to save in to pensions, it was a spectacular success in respect of harmonising legacy charging structures towards a single and fair annual management charge (broadly one percent) across the entire pensions industry.

Where the DWP and The Pensions Regulator are potentially seeking to impose tighter controls on how pension schemes are governed and monitored going forward, it is also important to acknowledge the cost of this governance must be met from somewhere.

So, whilst we agree in principle to the findings of the report, there is something of a history lesson to be done in terms of how we arrived at our current situation before setting out any path towards resolution.

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